Direct investment in commercial real estate in Europe stood at 24 bln. in the first half of 2009, according to new research from Jones Lang LaSalle. Levels in the second quarter were similar to volumes seen in the first quarter of the year. The 24 bln. transacted in direct commercial real estate investment in the first half of this year was down 42% on the second half of 2008 (41.5bln.).
Tony Horrell, Head of European Capital Markets at Jones Lang LaSalle said: "We believe that the European market has now reached a floor in transaction volumes and based upon investor interest we would expect an increase in turnover in the second half of this year. Prime office yields were largely stable in Q2 for the first time since mid 2007. Volumes have remained low because the bid offer spread remains wide in some markets due to price expectations and needs of owners. At the same time falls in capital values have made pricing attractive for those investors with equity or buyers who are not highly leveraged and who have good banking relationships."
He continued: "It is the high net worth individuals and equity players who are making the market at the moment, as the debt markets remain largely restricted; new lending remains tightly constrained and expensive and most large deals have vendor financing or stapled debt. There is no shortage of equity for income secure opportunities. We are seeing deep investor interest in London, with multiple bidding from international investors, some of whom continue to benefit from currency advantage."
Nigel Roberts, Chairman of European Research at Jones Lang LaSalle added: "The UK remains the largest market in Europe, accounting for 35% (approximately 8 bln.) of total European volumes, whilst Germany accounted for approximately 3.4 bln. Major Western European markets were marginally up in the second quarter compared to the first, albeit from a low base, including France, Spain and Italy, as attractive investment opportunities - often assets which rarely come to the market - have appeared."
Despite restrictive new lending conditions during the second quarter there were a number of transactions over 100 mln., although the majority of trading was in lot sizes between 20-50 mln. For many investors long term income and a strong covenant is the primary driver to making an investment decision; however investors remain risk averse to vacancy, short leases and capital spend.
Tony Horrell concluded: "We are seeing some price tension on small deals, mainly because they are equity led. Overall we expect to see a gradual pick up in volumes in the second half of the year across Europe, subject to availability of quality product. Investors will be watching closely to see if the perception that the market is turning in some geographies gathers pace. Whilst this is at variance with a weaker occupational outlook, those with the ability to buy will be keen not to miss the purchasing opportunity that appears before the bottom of the market."
Vladimir Pantyushin, Head of Research, Russia and CIS at Jones Lang LaSalle added: "Investments into Russian real estate also appear to have bottomed out in Q2 at a mere 120 mln. We now begin to witness higher activity on the market, in the form of asset transfers to repay debts as well as 'unencumbered' deals. The fact that Russia has posted one of the steepest price corrections raised the attractiveness of local assets, while the selection has expanded dramatically. Although investors continue to tread cautiously and expect further rental correction, there is a consensus forming that dramatic changes have become the thing of the past. If this belief is confirmed by the market in the next couple of months, we expect a rise of investor activity, particularly towards the end of the year."